Homeowner Associations have many pitfalls

In my expert witness work,  I see agents, buyers and sellers getting into unnecessary troubles when buying a condo or into an association.  What everyone seems to forget is that when you are buying into a homeowner association,   it is like buying a business. You are partners with all the other owners.  The association has income,  expenses and contingent liabilities.  Association are frequently sued and are known for filing lawsuits against their builder.  I live in an association who refused to comply with the law in California which says that Associations are supposed to use accrual accounting for its repairs and replacement reserve fund.  What this means is that the HOA is supposed to determine each year:

 

• All items which they are responsible for (roof, driveways, etc)
• Determine the life of that item
• Determine the remaining life of the item
• Determine the replacement cost of that item at the end of it's life
• Allocate the cost backwards, including inflation, and start collecting NOW so that there will be sufficient funds when the item has to be replaced in the future

The problem is that most Boards of Directors don't want to raise their due. When they raise them,  they raise them on themselves,  so the fight to keep the fees down.  Our association was told to collect some $20K or so into the reserves this year.  Did they do it?  Of course not,  the only budgeted $11K or so.  The result is that each year we get further and further behind until one day,  when something major has to be fixed or we have a disaster (Earthquake,  Flood,  tree falls on the building, etc) there won't be enough money,  so they do what is called a special assessment.  That means that the HOA sends a bill to everyone to pay up now.  I just had a friend who got a $4000 assessment on his property.   So, what is the lesson.  When you are considering buying into an HOA,  if you are not qualified to read a financial statement,  take it to a CPA and have it analyzed.  How much should they have in their reserves vs. what they actually do.  Here is an example;  If the HOA is $200,000 behind in reserves and there are 100 owners,  each one has a contingent liability of $2000.  (Kind of like state and city gov'ts with their retirement plans but I digress).  This means that dues have been to low and someday,  this is going to have to get paid back.  So,  the buyer has every right to ask for a price reduction.   And,  these issues become more complex now that many of the owners are not paying their dues.  I have a property for sale that has 25% delinquency.  Unfortunately,  we can't find a lender who is willing to make a loan on any property with more than 15% Delinquent.  Anybody want to pay CASH??  Please!    More next time.......